Medical Markets Can't Work?

Dr. Darshak Sanghavi, an academic pediatric cardiologist who (like all physicians) financially benefits from the cartelization of medicine, explains in Slate, the online magazine, that health care markets can’t work because of the information asymmetry between physician and patient (“Talk to the Invisible Hand”). So we need the cartel. This is not particularly surprising; most physicians think that. But it ain’t so.

Through several examples Sanghavi attempts to demonstrate that a medical market with the customer/patient in charge just doesn’t make sense. With the U.S. government now paying half of all medical bills and consumers paying only 10 percent out of pocket, it is not surprising that Sanghavi can show that marginal efforts to move toward a market without making any fundamental changes in the system do not always work, but let’s look at his examples:

In 2004 President Clinton developed chest pain, was diagnosed with coronary artery disease (CAD) and treated with coronary artery bypass grafting (CABG). Sanghavi notes that Clinton, savvy though we know him to be, did not study New York state’s database of hospital- and surgeon-specific death rates from heart surgery. Had he done so, he might have thought twice about having the surgery at Columbia-Presbyterian in New York City, which the database lists as having “the highest death rate of any of the 35 hospitals doing bypass surgery.” Sanghavi sees this as evidence that even savvy consumers cannot deal with the complexities of the medical marketplace. But is it?

First, in a true medical marketplace, hospitals might find it profitable to advertise the results of the database, something they have little incentive to do now, when patients remain rationally ignorant of the quality of hospitals not covered by their employer-chosen insurance. More important, the database in the form developed by New York state is crude. Are you better off going to a cardiac surgeon who does 50 CABGs per year, restricting his surgery to only otherwise healthy patients with mild CAD, and has a 1 percent complication rate, or are you better off going to a cardiac surgeon who does 500 CABGs per year, takes patients refused surgery elsewhere because they’re viewed as “too risky,” and who has a 2 percent complication rate overall (but among otherwise healthy patients with mild CAD has a complication rate of 0.4 percent—though this breakdown is not in the raw data offered by the New York database)?

How can one obtain such detailed analysis of the data? One can do what Clinton did: Go with the recommendation of the cardiologists he entrusted with his care. In a true medical marketplace he’d have even more options: Businesses would develop that analyzed such data and provided their analysis for a fee (or perhaps it would be available for free on the Internet, paid for by ads, like Google searches).

Sanghavi questions whether it helps for consumers to “have skin in the game”—that is, pay some health care costs directly so they no longer treat it as essentially a free good, overusing it and driving up costs. He acknowledges that the famous RAND Health Insurance Study (1982) showed that when patients paid 25 percent of costs, overall medical spending dropped 20 percent.

But Sanghavi is concerned. He notes that consumers “cut back equally on highly effective and largely pointless treatments.” He fails to say this means that under the highly regulated system he defends, where medical experts are in charge of determining what is needed without worrying about patient cost concerns, “largely pointless treatments” are still available. Of the RAND results Sanghavi notes with a concern that can only be felt by physicians: “The cost savings came from mostly avoiding doctors altogether.” But most people who see doctors have transitory complaints that resolve on their own, caused by problems or pathologies that are never determined, no matter the expense of the workup (headache and back pain being the two most common complaints). So it is good that “the cost savings came from mostly avoiding doctors altogether.”

Most important, the RAND study showed, though Sanghavi didn’t mention it, that with few exceptions, seeing doctors less often and spending 20 percent less overall “had no adverse effects on participant health.”

Of course, if we had a competitive market in health care, with all its implications for easier access to information, broader advertising of various options, direct price competition, easier access to medications, and more, I would expect that consumers might better distinguish “highly effective” from “largely worthless” medical practices. They seem to make good choices now when given the opportunity, in areas like Lasik and plastic surgery.

For Sanghavi, “The usual rules of the marketplace seem not to apply to health care” because doctors apparently know more about medicine than patients do. So doctors control the interaction. So regulations are needed. So the argument goes.

But this argument proves too much. Information asymmetry is the norm not the exception. Car dealers know more about cars than consumers do. The guys behind the Genius Bar know lots more about computers than Apple customers do. Are consumers always being ripped off? Sanghavi the pediatric cardiologist claims—correctly, I’m sure—that no parents ever questioned him when he ordered a special type of color Doppler cardiac ultrasound on their child. But he unfortunately seems to believe a medical marketplace is everything we have now—all the regulatory burdens, supply restrictions, informational prohibitions—except patients will pay more out of pocket. He ignores various other innovations that may help consumers get what they need despite information asymmetry. For example, competing cardiologists trying to simplify matters for patients might offer flat fees, including labs and imaging, so the consumer could compare physician costs more easily and not need to know whether a specific lab or ultrasound was “needed.” Alternatively, consumers could go on the web and use the services of Medical Cost Advocate. Such services would be more commonplace in a truly free market in health care.

Some say that health care is different, and if by that they mean the health care market has been artificially restricted, segmented, regulated, and distorted by government interventions dating back more than a century, they are right. Only the educational and financial industries come close in the degree of government regulation, which doesn’t speak well of regulation’s success. But if they mean health care is more complicated than anything else offered in the marketplace or that health concerns don’t respond to supply and demand or that medical services can only be provided when medical cartels battle government payers while insulating patients from the true costs of care . . . it just ain’t so.

THE FREEMAN

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.